Wolf at the Door: What Happened to the Predictions of Doom?

China watchers will remember that just over a decade ago, there was no topic more hotly debated in China, or seen as more important to the country’s future, than the anticipated accession to the World Trade Organization (WTO). In a memorable 2001 article in The China Quarterly, Joseph Fewsmith wrote that: “Ironically, after years of fuming that the West was trying to keep China out of the trade body, the prospect of actually joining has set off a flurry of speculation over the impact on China’s economy and many have begun questioning the benefits of membership.”

Prominent Chinese observers worried that China’s industries would be exposed to crippling competition, that farmers would be hurt by cheap and higher quality wheat and corn imports, and that China, as a nation, would become entangled in a global capitalist network that could erode the country’s sovereignty and, in the worst case scenario, reduce China to an “appendage” of the West, especially the United States.

The respected Chinese political scientist Wang Shaoguang, in 2000 warned that WTO entry would spur greater inequality and exacerbate unemployment at a time when the Chinese economy was generating fewer jobs, and when eight to 10 million new workers were joining the work force each year and some 200 million rural workers still needed to transfer from agricultural to non-agricultural employment. Worse still, Wang surmised, the burden of adjustment to the downside impacts of WTO membership would fall directly on those social segments already paying the heaviest price for China’s two decades of economic reforms: industrial workers and farmers. According to Wang, WTO entry would likely further increase unemployment and exacerbate regional inequalities, and could trigger domestic social unrest.

Wen Tiejun, also a past critic of China’s WTO entry — writing from the Centre for Agricultural Policy Research under the Ministry of Agriculture — argued the WTO agricultural agreement would allow wheat, corn and rice imports from the United States to increase dramatically. He concluded that imported wheat was not only cheaper, but also better quality and with a higher gluten content than domestic supplies, which would make it a better fit with China’s consumer tastes. Together, these three cereals equalled more than 20 percent of the commodity grain in China, and imports would have an enormous impact on Chinese agriculture.

In brief, respected voices inside China were predicting that accession to the WTO could, or would, lead to dire consequences. To the pessimists, WTO entry was the veritable “wolf at the door.”

The scenarios of gloom and doom, of rising social disturbances did not, however, come to pass. Nor was there a discernable increase in rural underemployment, urban unemployment or employment dislocation that could be directly attributed to WTO entry. So, what happened?

Three points are worth considering. First, imports of foreign grains and agricultural commodities did increase in the period after China’s accession to the WTO, due in part to the adjustment in the structure of agricultural production in China, as well as lower than expected domestic harvests. However, world agricultural market conditions worked in China’s favour, in ways that could not have been predicted, during the first two to three years after China joined the global trading regime. During research interviews with the author (in 2004), senior agricultural policy makers noted that world grain markets saw bumper harvests from 2002 to 2004, which meant the price of imported grain fell at the same time as China began to import more foreign grains.

Second, while the liberalization requirements of WTO accession did pressure China to conform to its comparative advantage, it also reinforced crop specialization and opened up new opportunities for export. Agricultural officials explained, during interviews, that the government had begun to implement a country-wide sector adjustment program aimed precisely at responding to increased foreign competition in agriculture. The program had two main dimensions: the first was to subdivide the country into 15 specialized agricultural zones, based on the particular comparative advantage of each agro-zone, and accompanying state subsidies for each zone to pursue sector specialization; and the second was to strengthen China’s agricultural industrialization and commercialization, by fostering domestic agro-business and promoting enterprise consolidation and managerial centralization. The campaign came to be known as creating “dragon head enterprises.”

Third, Chinese state planners and labour ministry officials warned that increased competition from foreign manufacturers was bound to worsen the considerable challenges the country was already facing in pursuing state-owned enterprise reform. The Party leadership also recognized that the heavily industrialized northeast region and the outmoded industrial bases of the western interior were likely to face formidable challenges in adjusting to the WTO. The government implemented a multi-year “Western Region Development” program. Major growth in urban industry and new service sectors was stimulated to help create job opportunities to offset layoffs in old industries. Equally important, new and targeted social security measures were financed to help mitigate the continuing layoffs stemming from the complete overhaul of the country’s state-owned enterprise system.

From 2002 to 2006, China created a new re-employment and social security system that now spans the entire country. While much work still needs to be done to “perfect” this system, it proved useful in managing the situation of recently laid off, chronically unemployed and “xiagang” workers (who remained on the books of the state enterprise, but were sent home and given one-quarter to one-third of their previous wages).

As others have noted in this CIGI commentary series, the decade of unprecedented growth that China has experienced since becoming a member of the WTO, surely helped to blunt the downside effects of WTO accession. However, as the points above suggest, a combination of contingent world market conditions and conscious state mediation also account for the lack of social or political drama in the wake of China’s WTO entry.

Looking back, the Party leadership banked on the potential upside effects of further integration into the global economy. However, it can be said that part of the credit for containing the “wolf at the door” should go to a proactive Chinese state bureaucracy, which undertook prospective measures to ward off the potential downside impacts of increased exposure to economic globalization.

Gregory Chin is the chair of the China Research Group at CIGI.

From 2001 to 2006, Dr. Chin designed and supervized the delivery of Canada’s official development assistance to the People’s Republic of China on WTO implementation capacity building. The programs provided WTO-related technical and expert support on “transparency” capacity building, policy research on economic adjustments, state enterprise and employment reform options, legislative and regulatory drafting, agricultural and agri-food systems modernization, trade facilitation and automotive industry reorganization.

Dr. Chin worked in cooperation with Chinese government officials and policy researchers at the central and local levels, and he liaised with the other donor organizations involved in providing support to China on WTO capacity building, including the WTO, the World Bank, United Nations Development Programme, Asian Development Bank, US Trade Representative, US Department of Commerce, US Department of Agriculture, the European Union and AusAID. He has written recently on China’s role in reforming the WTO, and in establishing new regional trade agreements in East Asia.

In brief, respected voices inside China were predicting that accession to the WTO could, or would, lead to dire consequences. To the pessimists, WTO entry was the veritable “wolf at the door.”

After more than 15 years of intensive negotiations, China joined the World Trade Organization in December 2001. This was a major advance for the global trading regime. In this exclusive commentary series, a select group of experts discuss what China’s accession has meant for the global trade system, examine how it has impacted China and consider the challenges to come in the next decade.

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